This occurs when someone makes payments to you and they are required by the IRS to withhold some of it and send it to them as an estimated payment of your taxes. This often is done by banks and other businesses that pay you interest, dividends, rent, or for services you render as an independent contractor.

When does it happen?

You will be subject to backup withholding if:

You fail to provide the business paying you with your correct taxpayer identification number when they request it.

The IRS notifies the payer to start backup withholding because you failed to report all of your interest and dividend income on your tax return.

Federal and state authorities request withholding for back taxes or there is a request from an agency for underpayment of child support or similar shortfall.